I'm the Detroit bureau chief for Forbes, which means I spend most of my time covering the automotive industry. But I also keep an eye on the rest of America's heartland—where stuff is manufactured and grown. I've been on the auto beat for more than 20 years at Forbes, Business Week and the Detroit Free Press. At the Boston Globe, I rode the tech bubble for a while, but I found there's nothing quite as fun as the auto beat. Whether you drive a car or not, everyone has an opinion about cars or car companies. What's yours?

10/10/2012 @ 9:16AM7,173 views

Why Ford Is Lagging GM On Wall Street

General Motors and Ford Motor shares tend to trade in tandem, even though we all know GM is the basket case that needed a federal bailout, while Ford sailed through the economic crisis without any taxpayer assistance.

Lately, though, investors seem to be showing more faith in GM. So far this year, GM shares are up 20 percent, while Ford’s are down 8 percent. The market capitalization for both companies is around $38 billion.

No doubt GM’s stock has been bolstered by the public endorsement of two well-known value investors, Warren Buffett and David Einhorn. Buffett’s Berkshire Hathaway disclosed in May it had purchased 10 million shares of GM. Then, last week, Einhorn cited GM’s upside potential in an address to the Value Investing Congress in New York. His Greenlight Capital owns 17.4 million shares, or about 1.1 percent of GM. (The U.S. Treasury, by comparison, owns 500 million shares, or about 26 percent.)

Both stocks are undervalued, with price-to-earnings ratios of around 8, vs. 12 for the overall industry. But aside from the Buffet Bump, GM stock has pulled ahead of Ford for other reasons. Investors have pretty much “baked in” all the bad news they know about GM. Its European business is a disaster; its engineering costs are still too high, and it’s got a pension cloud hanging over its head. There aren’t a lot of surprises there.

In the case of Ford, however, investors enamored by its up-by-the-bootstraps survival in 2009 and 2010 are beginning to notice some of the warts. It, too, has an ugly mess in Europe, but the company’s warning in July of a $1 billion loss there took many investors by surprise. It lost money in Asia and Africa in the second quarter. And Ford is spending like a drunken sailor in China to try to catch up with rivals including GM, Volkswagen and Hyundai, which have a big market share lead there. Ford plans to introduce 15 new models in China by 2015, and is building five new manufacturing facilities and bringing its Lincoln luxury brand there in 2014. Ford needs to become a major player in China, for sure, but the billions it is spending now will limit near-term corporate profits. In July, the company said its 2012 pre-tax profit will be lower than the $6.2 billion it earned in 2011. Third-quarter results will be announced in late October.

Strong profits in North America are carrying the company right now, but even here there are some worries. In the U.S., Ford has been losing market share, down 1.3 percentage points so far this year, to 15.5 percent, according to market researchers AutoData. Market share numbers can be distorted, however, by seasonal sales to corporate and government fleets. Most carmakers point to retail sales at dealerships as the best measure of market trends. If you strip out Ford’s sizable (and profitable) fleet sales, its retail market share is 12.8 percent year-to-date, down almost a full point since the same time last year. Like other carmakers, Ford is giving back some of the market share gained in 2011 when Japanese carmakers were hobbled by the earthquake and tsunami. GM’s retail share is down 2 points year to date, for instance.

But the point is this: For all the competitive advantages Ford has had since 2009 — its two domestic rivals in bankruptcy, the biggest Japanese carmakers crippled by quality recalls and natural disasters, and a new model lineup that was one of the freshest in the industry — Ford really hasn’t been able to make any lasting gains in the market. Since the 2009 crisis, its retail share is down 0.8 percent. Meanwhile, rivals like Hyundai, VW, Chrysler and GM have all gained.

Now it’s about to face a new assault on its most profitable vehicle: the F-150 pickup. Chrysler is just now launching a refreshed version of its Ram pickup, with an EPA fuel economy rating of 25 miles per gallon on the highway, better than any other pickup. And next year, GM will introduce its next-generation Chevrolet Silverado and GMC Sierra pickups. Ford isn’t scheduled to redesign the F-150 until 2014.

Then there’s the uncertainty about when Ford’s highly regarded chief executive Alan Mulally will retire, and whether his successor will be able to follow such a tough act. That, too, could be weighing down Ford’s stock. Published reports suggest Mark Fields, Ford’s president of the Americas, will soon become chief operating officer, making him the likely successor to Mulally.

Morgan Stanley Smith Barney analyst Adam Jonas isn’t worried about any of this. In a lengthy note to investors on Tuesday, he spelled out all the reasons why he’s bullish on Ford and thinks the stock could hit $17, up from just above $10 today. He thinks Ford will ultimately benefit in Europe when other competitors are forced to close plants. He says it’s good that Ford is not overly exposed to China’s slowing market for the next couple of years. Because most of its profit comes from sales of its pickup trucks, he says Ford shares will take off when the housing market fully recovers. “Ford is a housing stock in auto company clothing,” he writes. The F-150 will hold its own just fine against redesigned competitors, he writes. Besides, its own 2014 renewal isn’t that far off. And the drama over Mulally’s successor? Forget about it. Mulally changed the company for good, and whoever is the next chief executive will pick up where he left off.

It all sounds optimistic. But so far, investors aren’t sharing his enthusiasm.

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Comments

Mitt Romney is a lemon. Obama, a volkswagen van. Obama might have a bunch of pot smoking long haired hippies with bandanas galore driving. But with Romney, we’ll be stranded on the highway for god knows how long until we’re towed.

(a little off subject, but if you’re talkin’ cars…)

What we need is a Shelby Cobra style candidate. Get this nation moving. Mine, Santorum. Cain. & the like…

This is a fine article; and I agree with Adam Jonas’ comments, except for one thing. The American housing market will not reach its “bottom” for at least five more years; and query whether “full recovery” is anything more than a pipe dream in our lifetimes?

See http://naegeleblog.wordpress.com/2010/09/27/the-economic-tsunami-continues-its-relentless-and-unforgiving-advance-globally/#comment-2134 (“Housing: The Abyss”) (see also the article itself, as well as the other comments beneath it)

I will never buy another GM car because of two factors (1) the bailout, which continues with the propping up of Chevy’s Volt, etc.; and (2) the local dealer from whom my son and I bought cars, which was excellent, was “closed” by GM unceremoniously.

Ford is producing great cars today, but they are “world cars” and too small for some of us. I was anticipating the new Fusion, but sat in one recently and it must have been designed for “midgets.” Also, Ford is keeping its prices high, in comparison with Hyundai and other brands.

Also, why push out Alan Mulally? He rescued Ford; and Bill Ford said some time ago that he would stay for life. Are Ford’s directors so stupid that they sack the man who brought them success?

Timothy: I don’t think anyone is pushing out Mulally. The board is with Bill Ford on this: he could have the job for life if he wanted it. But I suspect that at age 67, Mulally would some day like to retire and play some more tennis while he can.

GM and Ford both have messses in Europe, where GM has traditionally been much stonger. Does GM’s lead now work for it (market share) or against it (too much capacity with unsustainable cost structures)?

Ford has been spectacularly absent from the big sellers except for its pickup. Where is the 500 or Taurus (or whatever they are calling it this week)? Where is the Fiesta? Is the Hyundai Elantra a dark horse (pun intended) that nosed past it? When the Elantra appeared it was an obviously superior value (and probably superior car) to the Fiesta, but it was also much lower profile, and the Fiesta is still a great car in its class. It’s hard to believe that Ford didn’t have much more production capacity at the ready and the Fiesta’s promo machine was in high gear. The Civic, Corolla, and even two versions of GM’s deathless Chevy Yawner all have done very well.

So what happened to Ford’s domestic cars? Come to think of it, where is the gen 2 Mustang, which had raves all the way around – looks, handling, retro-coolness and fans, quality, superior V6 w/ good mpg…